Crisis management in the financial sector is currently at the top of the reform agenda at national, European and international level. Well-designed bank resolution regimes are essential not only to meet the acute need of a credit institution in crisis but also to ensure that proper incentive structures operate in the market prior to any crisis. Existing regimes are inadequate and incentive structures have proven to be fundamentally destructive. The lack of workable crisis resolution tools has had an adverse effect on crisis prevention and imposed enormous costs on the taxpayer. Effective crisis management demands the ability to manage. In the aftermath of the financial crisis, two leading EU Member States (the United Kingdom and Germany) adopted special resolution regimes, providing for tools and powers to manage the resolution of banks. The paper assesses and compares these two approaches. In addition, the paper analyses the emerging response at European and international level, focusing in particular on bail-ins, the suspension of netting and other rights, treatment of groups and systemically important financial institutions. At the international level, the Financial Stability Board’s recently published ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ constitute a breakthrough in the development of a global resolution regime. At the EU level, the European Commission’s proposal for an EU crisis management regime is expected to be an even more ambitious step. The European financial sector reforms have the potential to achieve a quantum leap in the efficient cross-border management of key issues, in particular in the field of bank resolution and insolvency law. This may evolve into a whole new dimension of efficient cooperation and economic and political convergence. In the field of crisis management, the fact cannot be ignored that we need more Europe, not less.

21/12/2011

ECB/2011/27 Guideline of the ECB of 21 December 2011 amending Guideline ECB/2010/20 on the legal framework for accounting and financial reporting in the European System of Central Banks , en

20/12/2011

Announcing 20110145 (MRO,liquidity providing), for 7 days deadline 09:30, more

(JEL: E5, E6, G1) We introduce a specification of habit formation featuring non-separability between consumption and leisure into an otherwise standard New Keynesian model. The model can be estimated with standard Bayesian techniques and the bond pricing implications are evaluated using higher-order approximations. The model is able to reproduce a sizeable risk premium on long-term bonds and the cyclicality of fiscal policy has an impact on the bond premium that is quantitatively important. Technology, government spending, and mark-up shocks are the main drivers of the time-variation in bond premia.

(JEL: C32, E23, E25) This paper explores the behavior of profits in the four largest euro area countries (Germany, France, Italy and Spain) and the euro area as a whole, while at the same time considering three main sectors (manufacturing, construction and services) in each economy over the period 1988–2010. The paper presents stylized facts about profit developments and, applying a vector autoregressive modeling framework, discusses the sensitivity of profits to four distinctive structural shocks (a demand shock, an employment shock, a wage and price mark-up shocks). In addition, it provides the shock decomposition of historical developments in profits across countries and sectors.

(JEL: C11, C53) This paper develops a multi-way analysis of variance for non-Gaussian multivariate distributions and provides a practical simulation algorithm to estimate the corresponding components of variance. It specifically addresses variance in Bayesian predictive distributions, showing that it may be decomposed into the sum of extrinsic variance, arising from posterior uncertainty about parameters, and intrinsic variance, which would exist even if parameters were known. Depending on the application at hand, further decomposition of extrinsic or intrinsic variance (or both) may be useful. The paper shows how to produce simulation-consistent estimates of all of these components, and the method demands little additional effort or computing time beyond that already invested in the posterior simulator. It illustrates the methods using a dynamic stochastic general equilibrium model of the US economy, both before and during the global financial crisis.

20/12/2011

Publication Letter from the ECB President to Mr Sven Giegold, Member of the European Parliament , download

20/12/2011

Publication Letter from the ECB President to Mr Nuno Melo, Member of the European Parliament , download

19/12/2011

Speech Mario Draghi: Hearing at the Committee on Economic and Monetary Affairs of the European Parliament, en

(JEL: E62, H60, H68) This paper surveys the empirical research on fiscal policy analysis based on real-time data. This literature can be broadly divided in three groups that focus on: (1) the statistical properties of revisions in fiscal data; (2) the political and institutional determinants of projection errors by governments and (3) the reaction of fiscal policies to the business cycle. It emerges that, first, fiscal data revisions are large and initial releases are biased estimates of final values. Second, the presence of strong fiscal rules and institutions leads to relatively more accurate releases of fiscal data and small deviations of fiscal outcomes from government plans. Third, the cyclical stance of fiscal policies is estimated to be more ‘counter-cyclical’ when real-time data are used instead of ex-post data. Finally, more work is needed for the development of real-time datasets for fiscal policy analysis. In particular, a comprehensive real-time dataset including fiscal variables for industrialized (and possibly developing) countries, published and maintained by central banks or other institutions, is still missing.

(JEL: C53, D8, E32) In this paper we discuss the role of the cross-sectional heterogeneity of beliefs in the context of understanding and assessing macroeconomic vulnerability. Emphasis lies on the potential of changing levels of disagreement in expectations to influence the propensity of the economy to switch between different regimes, a hypothesis that finds robust empirical support from a regime-switching model with endogenous transition probabilities for output growth and realized stock market volatility in the US.

(JEL: J310, J450, O520) We investigate the public-private wage differentials in ten euro area countries (Austria, Belgium, France, Germany, Greece, Ireland, Italy, Portugal, Slovenia and Spain). To account for differences in employment characteristics between the two sectors, we focus on micro data taken from EU-SILC. The results point to a conditional pay differential in favour of the public sector that is generally higher for women, at the low tail of the wage distribution, in the Education and the Public administration sectors rather than in the Health sector. Notable differences emerge across countries, with Greece, Ireland, Italy, Portugal and Spain exhibiting higher public sector premia than other countries.

(JEL: E31, E43, E44, F31, C58) Since the end of the fixed rates in 1973 and after the EMS sterling dismissal in 1992, the value of the pound has undergone large cyclical fluctuations on average. Of particular interest to policy makers is the understanding of whether such movements are consistent with the lack or not of a correction mechanism to some long-run equilibrium. The purpose of the present study is to understand those dynamics, how the external value of the British sterling relative to the USD evolved during the recent floating experiences, and what have been the driving forces. In this paper we assume the real exchange rate to be determined by forces relating to the goods and capital market in a general equilibrium framework. This entails testing the purchasing power parity and the uncovered interest parity together. Our findings have two important implications, both for monetary policy. First, we show that some of the observed changes in the real exchange rates can not be solely attributed to changes in inflation rates, but, possibly, also to investors’ behavior. Secondly, we show that the special US dollar status of World reserve currency results into a weaker behavior of the US bond rate on international markets.

13/12/2011

No. 1404: A VAR analysis for the uncovered interest parity and the ex-ante purchasing power parity: the role of marcoeconomic and financial information, by Corrado Macchiarelli, description, download

(JEL: E31, E43, E44, F31, C58) This study revisits the relation between the uncovered interest parity (UIP), the ex ante purchasing power parity (EXPPP) and the real interest parity (RIP) using a VAR approach for the US dollar, the British sterling and the Japanese yen interest rates, exchange rates and changes in prices. The original contribution is on developing some joint coefficient-based tests for the three parities conditions at a long horizon. Particularly, test results are derived by rewriting the UIP, the EXPPP and the RIP as a set of cross-equation restrictions in the VAR (see also Campbell and Shiller, 1987; Bekaert and Hodrick, 2001; and Bekaert et al., 2007; King and Kurmann, 2002). Consistent with the idea of some form of proportionality among the above three parities, we find a ”forward premium” bias in both the UIP - as it is normally found in empirical analysis (e.g. Fama, 1987) - and the ex ante PPP. The latter result is new in the literature and stems from testing the PPP in expectational terms, thus assuming agents to bear on the uncertainty of future exchange rate changes and inflation dynamics. The overall results confirm the UIP to be currency-based (see also Bekaert et al., 2007) and the EXPPP to be horizon-dependent (see also Lothian and Taylor, 1996; Taylor, 2002). Moreover, we find (weak) evidence that conditioning the VAR on variables having a strong forward-looking component (i.e. share prices) helps recover a unitary coefficient in the UIP equation.

(JEL: R11, R12, C23, J20) Despite its rather broad goal of promoting “economic, social and territorial cohesion”, the existing literature has mainly focused on investigating the Cohesion Policy’s growth effects. This ignores the fact that part of the EU expenditures is directly aimed at reducing disparities in the employment sector. Against this background, the paper analyses the impact of EU structural funds on employment drawing on a panel dataset of 130 European NUTS regions over the time period 1999-2007. Compared to previous studies we (i) explicitly take into account the unambiguous theoretical propositions by testing the conditional impact of structural funds on the educational attainment of the regional labour supply, (ii) use more precise measures of structural funds for an extended time horizon and (iii) examine the robustness of our results by comparing different dynamic panel econometric approaches to control for heteroscedasticity, serial and spatial correlation as well as for endogeneity. Our results indicate that high-skilled population in particular benefits from EU structural funds.

13/12/2011

No. 1402: Monetary policy and the flow of funds in the Euro Area, by Riccardo Bonci, description, download

(JEL: E32, E4, E52, G11) This paper provides new evidence on the transmission of monetary policy in the euro area, assessing the impact of an unexpected increase of the short-term interest on the lending and borrowing activity of the different economic sectors. We exploit the information content of the flow-of-funds statistics, that provide the most appropriate framework to analyse the flowing of funds from one sector (the lender) to the other (the borrower). We proceed in two steps. First, we estimate a small VAR model for the euro area over the period 1991Q1 to 2009Q2. Then, we extend the benchmark VAR model in order to include the flow-of-funds series and analyse the response of the latter variables to a contractionary monetary policy shock. We find that the policy tightening is followed by a worsening of the budget deficit; firms cut on their demand for bank loans, partially replacing them with inter-company loans, and draw on their liquidity to try to offset the fall of revenues associated with the slowdown of economic activity; households reduce net borrowing and increase precautionary saving in the short run. Consistent with the bank lending channel of monetary policy at work, the interest rate hike is followed by a short-run deceleration of credit growth, mainly driven by the response of banks.